Bernanke's testimony today:
Mr. Bernanke's testimony was no real surprise today after the gist of the testimony was relatively correctly anticipated by observers: namely that the Fed intends to keep rates low for some time to come, but that it has the tools necessary to remove monetary stimulus down the road to prevent inflation. The Fed currently expects unemployment to be a key factor in an economic recovery and expects unemployment to peak in the second half of 2009. When asked about further bond purchases by the Fed, Bernanke indicated that the FOMC would decide this point.
Bernanke also attempted to defend the Fed's right to secrecy from public and congressional oversight as important for the success of its programs. The Fed discouraged plans for an immediate second stimulus package, saying that much of the first stimulus remains to be spent and indicating it may take until 2010 to judge the success of the first stimulus. He also warned the administration on the unsustainable of current deficit levels.
The market reactions, despite the relatively unsurprising testimony, however, have been rather large, and the testimony so far seems to be serving as a pivot point across markets - especially in government bonds. The 10-year note yield benchmark has dropped almost 25 bps from yesterday's highs as of this writing, perhaps as the market feels they are a safer investment without any reason to believe the Fed is about launch any determined new measures that would risk devaluing the dollar and US debt further and that the Bernanke's reassurances have some measure of credibility. With the sharp drop in long yields and a profit taking in the torrid equity market rally of late, the USD has recovered fairly well from its new six week lows today, a reversal worth watching. The moves are also unequivocally bullish for the yield-sensitive JPY, which is storming higher again across the board. EURJPY was unable to sustain the move above the 55-day moving average and has so far mounted a sharp bearish reversal of recent action.